Carroll has re-discovered his form since returning from injury, scoring five goals in his last eight matches to take the Hammers to the brink of safety with five games of the season remaining.
"The next move is a critical one for him," the West Ham manager said. "It's about playing, improving and scoring goals. That next move has to implement all of that for the team he plays for and him."
Although just 24-years-old, Carroll has had an eventful life, earning a £35million move to Liverpool after becoming an icon at his hometown club Newcastle.
It has not all been plain sailing for him, however. He was shipped out on loan to West Ham after flopping at Liverpool while his lifestyle off the field led to concerns the 6ft 3in marksman would not blossom into the deadly striker everyone expected him to become.
But having found his feet at West Ham, Allardyce believes Carroll is now in the most settled period of his career, and given that he will soon be entering his prime, he knows the next contract he signs will have a huge bearing on the player's future.
Newcastle are reported to be considering a cut-price move for the Gateshead-born striker, but Allardyce thinks Carroll would be better off staying in east London.
"He is growing day by day and is enjoying his football," Allardyce said. "You have to live and learn by your experiences in life. In his younger days he was picked out on several occasions.
"We have to be careful about portraying himself in the open public domain. I don't see any problem with him being in London. He has slipped in really well. He gets on well with Kevin (Nolan) and others. He's big buddies with Joey O'Brien.
"We would love it to work out long-term. But things need to be done and identified at the end of the season."